Youth, family and casual games, which several years ago -- back when Disney-Pixar's Cars license drove big sales for THQ -- accounted for more than 50% of the company's revenue, have fallen to roughly 20% to 30%, says Todd Mitchell, a Kaufman Bros. analyst. The Mattel deal will help fill the gap left by the Cars video game, adds Mitchell, who rates THQ a buy.

In spite of the news, THQ shares fell a little more than half a percent in afternoon trading, closing at $6.32 a share, while the broader markets climbed. The dip in THQ shares may have simply been due to investors skimming some profits off of the stock, which has climbed roughly 4.5% in the past few days. It doesn't mean the stock is done with its run, UBS analyst Brian Fitzgerald notes.

And within the past month, Wall Street analysts have upped their earnings expectations on THQ's stock, according to Thomson Reuters StockReports+.

THQI's Earnings Rating has improved significantly, growing to 9 from 7 two weeks ago and from 4 a month ago. The current rating is considerably more bullish than the toys subsector average of 6.5.

Over the past 90 days, the consensus price target for THQI has increased 14.5% from 4.72 to 5.41.

In the past 30 days, three analysts have raised their earnings estimates. The current mean is 25 cents a share for the just-ended quarter.

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In addition to strong sales of uDraw, THQ's upcoming first-person shooter video game Homefront is expected to sell well when it hits shelves in early March for the Xbox 360, PC and PlayStation 3. Homefront also has played a role in driving THQ's stock, says Fitzgerald, who recently increased his price target to $6.25 a share from $4.45 a share.

Some Challenges Ahead

But not all Wall Street analysts are in love with THQ. Several, including Fitzgerald and Michael Pachter of Wedbush, have a neutral recommendation on the stock.

After THQ's success with Cars, wrestling game WWE, racing game MX vs. ATV, action-adventure game Saint's Row and a couple of Nickelodeon titles back in fiscal 2007, the company has struggled, according to a research report by Pachter.

"The problem over the last four years was a decline in contribution from many of the company's licensed properties, and less-than-stellar success from many of its wholly owned intellectual properties," Pachter wrote in his report. That said, the company plans to increase its efforts to develop its own games and views 2011 as a transition year, he added.

While Fitzgerald and Mitchell don't characterize THQ as a turnaround story, they note the company has made some improvements. The company remains focused on its games for kids and families, digital games and a high-definition platform for its games to run on, Fitzgerald says.

The HD platform games, digital downloads and games that operate with motion controllers have driven the digital and high-end console business up by 25% to 30% this year over last year, so THQ is focusing on the right areas of business, he says. After all, video-game companies heavily focused on handheld devices and the Wii platform also have seen their sales fall by a similar margin of 25% to 30%, he adds.

"Overall, the market looks abysmal," Fitzgerald says. "But depending where you look, there are healthy parts of the business."